Mergers and Arrangement pursuant to the provisions of the Companies Act, 2013 are implemented to revive sick companies’ potentials by merging them into other profit-making entity and ultimately to liquidate them or by demerging particular undertaking of the company in to the other company.
The Code has come into existence with the objective inter alia to consolidate and amend the laws relating to reorganization (which includes mergers, demergers, acquisitions) and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons and balance the interests of all the stakeholders. The Code is inter alia intended to revive Sick Corporates as far as possible and if the revival is not possible, then to liquidate the same.
Important Terms used in the Code:
- Corporate Debtor: A corporate person who owes a debt to any person.
- Resolution Plan: It is a plan proposed by Resolution Applicant for insolvency resolution of the corporate debtor as a going concern in accordance with the provisions of the Code.
- Committee of Creditors: means committee of Financial Creditors constituted by Interim Resolution Professional who approves resolution plan.
- Insolvency Professional: means a person enrolled under section 206 of the Code with an insolvency professional agency as its member and registered with the Insolvency and Bankruptcy Board of India as an insolvency professional under section 207 of the Code;
- Adjudicating Authority: means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013
Shareholders vis-à-vis Creditors
Mergers of the Corporates are regulated by section 230-233 of the Companies Act, 2013. These
Mergers are initiated with the approval of shareholders with Special Resolution i.e. 75% majority.
The Code authorizes Creditors to approve resolution plan containing sale of business of the entity or its merging into other entity by 75% majority of Committee of Creditors.
Transferor /Transferee vis-à-vis Insolvency Professional
When Corporate Insolvency Process is initiated under the Code, Insolvency Professional is appointed under the Code who takes control over the assets of the Company, receives resolution plans from stakeholders containing proposals of sale of an undertaking / business of the Company and place the same before Committee of Creditors for their approval and on approval, executes the Sale of Undertaking.
In mergers under the Companies Act, Transferor Company (Seller) has to identify Transferee Company(Buyer) or vice versa. However, once Corporate Insolvency Process is initiated under the Code, any qualified resolution applicant can submit resolution plan to the Insolvency professional for revival of the company. This peculiarity of the Code gives wider options for mergers/demergers by sale of Company or its business /undertaking to outside public.
Mergers & Acquisitions prohibited during the moratorium period
When application filed by company or its creditors to initiate Corporate insolvency resolution process is admitted by Adjudicating Authority, the corporate debtor (company) cannot sale its assets until the expiry of moratorium period of 180 days (extendable further up to 90 days), or until a sale process is approved by the Adjudicating Authority. This time gap can affect value of the assets and business of the Corporate Debtor and on the other hand company cannot separately enter into any arrangement of merger or acquisition with any other party.
Thus, the Code is encouraging revival of corporate debtor in time bound manner by way of reorganization through resolution plan.